Dollar hits two-month low against yen on housing woes

TOKYO (AFP) - The dollar hit a two-month low against the yen and traded close to its record trough versus the euro in Asian trade Tuesday as the health of the US economy remained the market's biggest worry, dealers said.

The dollar dropped to 120.55 yen in Tokyo morning trade, down from 120.99 in New York late on Monday.

The euro was at 1.3827 dollars, up from 1.3811 dollars late Monday, when it had earlier hit an all-time high of 1.3845. The euro fell to 166.70 yen from 167.13.

Worries about problems in the US sub-prime mortgage sector -- loans to homeowners with patchy credit histories -- continued to weigh on sentiment, said Nobuo Kihara in forex sales at BNP Paribas.

But he said that if there is a lull in the bad news on the US housing market then the dollar could stabilise somewhat.

"Unless any further negative surprises occur in the US sub-prime market, it is unlikely that the euro will hit another record high," Kihara said.

The dollar has come under heavy pressure recently due to concerns that a weakening US housing market could drag down consumer demand and thereby hamper momentum in the economy as a whole.

The sub-prime concerns look set to dominate at least until Wednesday, when the Federal Reserve's Beige Book economic report and existing home sales data are due for release.

Dealers said the housing jitters may be affecting the 'carry trade' as investors grow more risk averse.

Carry trade is a risky but popular practice of borrowing money in countries with low interest rates such as Japan and investing it in countries with high interest rates such as Australia or Britain.

"Investors wonder whether carry trades have gone too far and are due a significant correction," commented NAB Capital analyst John Kyriakopoulos.

"Modest carry trade unwinding is possible if the US-centred credit spread widening spills over into global markets or a hard landing in the US starts to look more likely," he warned.

Japan's financial markets were monitoring political developments ahead of Sunday's upper house election, with polls showing Prime Minister Shinzo Abe facing heavy losses that could prompt calls for his resignation.

However, a defeat for the ruling bloc will have a limited impact on the currency market as traders have prepared for it, said Kihara at BNP Paribas, predicting that even if Abe goes, the governing party will remain the same.